The latest press release, I ,mean editorial, I mean advertorial from Emirates Business is pretty clear that Dubai’s property bubble has finished deflating and we are back to boom times. Hold on to your hats!

“Most industry participants and analysts yesterday agreed with an HSBC research report that said the gloom and doom in Dubai’s real estate sector has ended, with property prices bottoming and initial signs of confidence returning.

“Distressed stock is gradually clearing, with further signs of consolidation as volumes continue to pick up. Also, more recently, mortgage providers have moved to ease their requirements, raising loan-to-value (LTV) and relaxing credit norms, which we view as a further sign of some normalcy returning to the market,” HSBC said.

According to the bank, the May transaction survey suggests that the market is starting to bottom out, with agreed prices up four per cent and five per cent month-on-month in April and May, respectively.

Apartment prices (which account for 85 per cent of transactions) are up nine per cent in May, villa prices continue to come under pressure, down 11 per cent month-on-month. Villa agreed prices have now fallen 49 per cent since a September 2008 peak, compared to only 16 per cent for apartments, HSBC said.”

This is strangely at odds with the fact that not one single property sold at Dubai’s first property auction; the amount of discounted property in my inbox has gone through the roof; and a minuscule increase in median property prices does not a summer make. Speaking of summer, Arabian money rightly points out that the summer exodus is about to begin and the reason the stock market rose was largely down to an increase in oil prices.

And the HSBC reports also states: “1). With the summer approaching volumes are likely to soften leading to short-term price volatility. 2). The school year coming to an end in June, and more supply coming on the market could lead to renewed (real estate) price weakness. 3). A further downturn in the global economic environment is likely to have an adverse effect on the market.”

The global financial crisis has hit Dubai particularly hard and Dubai’s property bubble has burst in a big way. Banks and property companies are renegotiating or defaulting on contracts left and right. The lawsuits are already starting to fly according to Reuters news agency.

Ashley Painter, partner at Clyde & Co’s Middle East financial services unit specializing in banking and finance, said his company was dealing with dozens of law suits.

“Anything that is not completed I think would be under some form of negotiation. It depends, of course, which developer you are talking about…” Painter told Reuters Islamic Banking and Finance Summit in Dubai.

“They are looking to give haircuts to the sub-contractors so that the cost of building the things is going down… They are renegotiating the payment terms with the borrower…” he added.

“We are dealing with numbers of them, dozens.”

Dubai, which put itself on the international map with developments such as the world’s tallest building, has seen its once-booming real estate sector battered by the global financial crisis as credit dries up and major projects are canceled.

Over half of the residential and commercial property projects due for completion in Dubai between 2009 and 2012 have been suspended or canceled, Jones Lang LaSalle said last month.

Several Dubai-based contractors have said they are owed millions by state-linked developers and may face bankruptcy. As it is, the British Business Secretary, Lord Mandelson had to approach the rulers of Dubai and Abu Dhabi regarding non-payment of bills to British firms.

“The level of litigation we are seeing, especially in the construction sector, suggests that there are bills that are not being paid,” said Peter Hodgins, partner at Clyde & Co’s Middle East financial services unit and expert on Islamic insurance.

The Dubai government said in February it had paid all outstanding obligations for public sector infrastructure projects after a short delay.

Malaysian engineering firm WCT and Dubai’s Arabtec Holding ARTC.DU are seeking at least $460 million in compensation after their contracts to build a racecourse in Dubai were canceled.

Both firms are initiating a civil suit and arbitration proceedings against the developer Meydan over an alleged breach of contract for cancelling the deal.

But with most of Dubai’s major developers entirely or partly owned by the government or ruler, smaller contractors are often loath to press their claims in court for fear of losing future work in the world’s largest oil-exporting region.

“If you decide to sue the government here you have to take the view that it is worthwhile doing so and that perhaps you don’t want to do any more business in the Gulf,” said Painter.

Whether companies decide to sue, try to renegotiate contracts out of court or cut their losses and wind down their business, cases can be complicated by the lack of a paper trail, the lack of sophisticated bankruptcy laws and the fact that developments were financed by pre-selling units off-plan.

“Dubai, but also other parts of the Gulf, because it was such a bubbly environment, the documentation did not necessarily keep up with the pace of the deals…” Painter said.

“In this part of the world the end user actually financed the construction… so it is more complicated…The great thing about the banks is that they are often linked to Dubai or Abu Dhabi governments so they can get more deposits.”

The UAE central bank and finance ministry have together launched 120 billion dirhams ($32.67 billion) worth of funding facilities for banks since September. The central bank has also bought $10 billion in Dubai government bonds to enable it to help state-linked firms to meet obligations.

UAE bankers and central bankers say liquidity is returning but Islamic banks tend to have more exposure to the real estate sector because their products are linked to physical assets and they tend to shy away from litigation or arbitration, placing the onus on agreeing in good faith, the partners said.

“Their costs of funding can be quite expensive… A lot of the deals have to do with real estate and it is no secret that real estate has taken a dive… and they are looking to see how they can manage their exposures,” said Painter.

Things do seem to be going from bad to worse in Dubai, although one of the major developers, Nakheel,has started receiving funds from the Dubai Government.

In an interview with Emirates Business, Nakheel’s Chief Executive Officer, Chris O’Donnell, confirmed the company is recieving government bailout money. However when asked if the figure stood at Dh2 billion, he said: “The actual figure is confidential and so are all the other details. But yes, Nakheel is receiving funds.”

Nakheel is also talking to its contractors and re-negotiating payments plans and contracts. “Yes, we are trying to help them and ourselves through our current situation. We are at the stage of commercial settlements and negotiations. Rather than detail on percentages, it is a true statement to say that construction costs are falling and there is definitely a reduction,” said O’Donnell.

“Part of our obligation to our customers is to ensure that we get them the best buildings. Hence, we are talking to our contractors to get cost-effective solutions.”

The Burj Dubai reached it’s final height of 818 meters recently, but we are hearing an interesting rumor that, the Burj Dubai is now wholly owned by the Abu Dhabi government (see the recent Dubai bond issue) and as “punishment,” for their vaulted ambitions, the building will be left empty for at least one year after it is finished being fitted out.

We all know there is no love lost between the sheiks, and Abu Dhabi has consistently criticized Dubai for building extravagant monuments in the desert. The Dubai property bubble has burst in a big way, and there is a good argument that the Dubai luxury property market will never recover from the current crisis and even if they were to start accepting tenants, I have a feeling they would have a tough time doing so in the current economic environment.

The Dubai International Property Show opened today with almost “no visitors” according to Property wire.

‘These are the difficult times and we must admit the reality and then find the solution,’ said Abdullah M Al Shizawi, managing partner of Heart of Capital.

“Last year, visitor turn out was amazing and we had number of good deals. But today there are almost no visitors,” he added. Dawood Al Shirawi from the Strategic Marketing and Exhibition, the event organiser said that it was challenging. “Right now the local market is going through the correction period due to the global recession,’ he said. Only serious investors are visiting the fair to check the pulse of the market.”

And another real estate agent in Dubai closed their doors as the global downturn hits Dubai hard. Millford real estate joins Casa Dubai, which closed down after losing everything, including a number of investor’s deposits when sales dried up and local developers took off with the cash. Luxury property in Dubai has been hit harder than most, relying as it was almost entirely on speculative purchasing and prices have fallen as much as 50% on some developments over the last few months. Dubai also faced the spectre of foreclosures and repossesions, and many are suggesting that the current untested laws will fall short.

Image credit
Property wire